The Carry Trade Returns!

Good day… Well, it’s not officially spring yet, but we experienced some spring-like weather here in the Midwest this past weekend… Which was good for me, because I had spent nine of the last ten days in Florida, and coming home to cold yucky weather would not have been high on my hit parade!

Recall last week when I wrote that I didn’t think the action of the previous week was an indication of the carry trade unwinding? Well… That thought sure has played out in the markets since the dust settled on the volatility created by former Fed Chairman, Greenspan’s words about a recession for the United States. The carry trade is back on the front burner, and it’s all there for us to see.

Japanese yen has given back three whole yen, while the high yielding currencies like New Zealand, South Africa, Iceland, Mexico, and even the United States (to a degree) have come back with a vengeance! Sort of like a scene from Wayne’s World… Game On! To extend that thought… Even pound sterling has rebounded. I don’t normally think of the United Kingdom as having high yields… But when it comes to core Europe, they do.

The thing I think we take from this is a warning… Yes, a warning, that this was only a small illustration of how the currencies will react once the carry trade does fully and earnestly unwind.

OK… Enough on that darn carry trade. The Jobs Jamboree Friday was quite mixed. The United States only created 97K jobs (I recall saying jobs would be less than 100K!) in February… However, the January showing of 111K jobs was revised upward to 146K, and the unemployment rate fell one tick to 4.5%. Now, on the outside this looks better than mixed, right? Ahhh, grasshopper… The numbers have to be looked at on the inside to see that the private job creation was awful, and that if it weren’t for 39K in Government Jobs, this report would have a different tone to it, eh?

In addition, there was a dramatic fall in construction jobs (-62K), and yes, bad weather played a role, but in my opinion, this data will continue to show a weakening trend in construction jobs. Manufacturing jobs fell again (-14K). So… What pushed jobs to 97K? The Service Sector… On a side bar here, I’ll just repeat something I’ve said before… We’ve become a service economy, and the “service” we receive is awful! We’re not even good at what we’ve become!

So, the dollar rallied a bit on this fall in the unemployment rates… And then rallied a bit more when the trade deficit was announced by the media as “narrowing” in January to $59.1 billion. Let me take you back to January. Recall the dollar had begun to get sold around Thanksgiving, and into the end of the year, thus making it much cheaper. And then lo and behold we see that exports in January grew 1.1%. Hasn’t this been my exact point all along? That the dollar needs to get weaker to allow exports to help correct the global imbalances?

Speaking of global imbalances… China’s trade surplus was three times more than the economic “experts” expected. China’s trade surplus widened to $23.76 billion, which was the second highest monthly figure EVER! I can see the “boys” (Schumer and Graham) fidgeting in their seats, sweat dripping from their brows, and rubbing their hands. What are they to do? They’ve gone to China, and that didn’t work… They’ve threatened to introduce tariffs, and the threat hasn’t worked.

What’s it going to take to get China to move to a more flexible currency policy? What can we do? Well… In the words of Edwin Starr… Nothing, absolutely nothing! This is China’s currency policy, and we’re stuck playing with their bat and ball here… Grin and bear it, Mr. Schumer and Mr. Graham!

Oh, don’t get me wrong here, I would love to see China change their currency policy to become more flexible, but you have to be realistic.

OK… After last week’s rate hike by the Reserve Bank of New Zealand and the European Central Bank, we’ll most likely see Norway’s Norges Bank hike rates on Thursday, and hopefully tell the markets that they’re still not finished raising rates. This will keep the krona underpinned and set it to strengthen further versus the dollar.

My friend, John Mauldin, followed up on the subprime mortgage meltdown in his Friday letter. Let’s see what John had to say…

“Last week listed 28 subprime mortgage firms that were shut down or taken over. The count is now 34. Yesterday the third largest lender of subprime mortgages, New Century, stopped accepting new loan applications. The shares were once at $50. Now they are under $4 and falling. The Financial Times reports that they cannot meet their margin calls from their lenders.

Essentially, New Century has been shut out of the capital markets. They are being hit with a wave of lenders who are demanding they take back the mortgages they sold, and my guess is that they do not have the capital they need. Maybe they can sell assets and get them. Who would take their paper or their mortgages today, knowing the problems? The money available to subprime lenders is rapidly evaporating, and until the lending standards are tightened considerably, it will remain that way. Many of the buyers of the Mortgage Backed Securities are going to lose some money.”

Uh-oh… You can hide your head in the sand regarding this problem, which will be a major reason the U.S. economy heads into a recession. Or, you can make certain you have protected yourself with a strong diversified investment portfolio.

The monthly budget statement for February will be printed today. Tomorrow we get retail sales for February. The Butler Household Index (BHI) tells me that we should see a slight increase in retail sales, but still nothing to write home about.

The euro sold off on Friday with the mini dollar rallies, but recovered nicely later in the day. With the euro moving back toward 1.32, the rest of the currencies can get back to hanging onto the euro’s coattails.

A great response from everyone to my announcement of the Japanese REIT MarketSafe CD on Friday! If you missed class on Friday, go to the Pfennig’s archives at and read about it there. I’ll have it as an ad later this week. So, on that thought, we’ll head to the Big Finish!

Currencies today: A$ .7842, kiwi .6950, C$ .8545, euro 1.3175, sterling 1.9430, Swiss .81.45, ISK 67.25, rand 7.32, krone 6.15, SEK 7.04, forint 189.20, zloty 2.94, koruna 21.43, yen 118, baht 32.80, sing 1.5260, HKD 7.8140, INR 44.25, China 7.7530, pesos 11.11, dollar index 83.90, Silver $13, and Gold… $652.11

That’s it for today. I trust you remembered to set your clocks ahead yesterday. I was supposed to be in Jacksonville today, but that didn’t work out, so I’ll call in to the meeting, and hopefully not fall too far behind this morning on the trade desk. Did your team make the “Big Dance” AKA the NCAA Basketball Tournament? Let the bracketology begin! It all starts on Thursday, so get your brackets finished before then! Happy birthday to my good friend, Rick, who celebrated on Saturday. This Saturday is St. Patrick’s Day… One of my faves! So get out your green, and have a great Monday and week!

Chuck Butler — March 12, 2007